Week 1

Economics and Well-being

 PLAN
• Economics and well-being
• GDP per capita comparisons
• Defining GDP
• GDP is both product and income
• Uses and limitations of GDP
• Broader measures of well-being
• Measuring subjective well-being
How did the pioneers of economics define it?

John Stuart Mill (1848):

‘the science which traces the laws of such of the

phenomena of society as arise from the combined
operations of mankind for the production of wealth…’

William Jevons (1871):

‘a calculus of pleasure and pain’

Alfred Marshall (1890):

‘Political Economy or Economics is a study of

mankind in the ordinary business of life; it examines
that part of individual and social action which is most
closely connected with the attainment and with the
use of the material requisites of wellbeing. Thus it is
on the one side a study of wealth; and on the other,
and more important side, a part of the study of man.’

Lionel Robbins (1932)

‘Economics is a science which studies human

behaviour as a relationship between ends and
scarce means which have alternative uses.’
Dr James Farrell (Econimics Lecturer UWS)

Economics studies the operations of economic

systems, and evaluates them according to how
they promote well-being.
Why are some people or some countries
better of or richer than others?

But first, what do we mean by that?

What are we measuring?

 PLAN
• Economics and well-being
• GDP per capita comparisons
• Defining GDP
• GDP is both product and income
• Uses and limitations of GDP
• Broader measures of well-being
• Measuring subjective well-being
GDP per capita = GDP/Population

Australia: $39,407

USA: $47,184

China: $7,536
Constant Price Gross Domestic Product in Australia,
Billions of Chained 2007-2008 Australian Dollars, Annual,
Seasonally Adjusted
 Real (Constant Price) GDP in Billions

2011 1456
2012 1508

Growth rate for 2012 =

1456 - 1508 1508

  1  0.036  3.6%
1456 1456
 PLAN
• Economics and well-being
• GDP per capita comparisons
• Defining GDP
• GDP is both product and income
• Uses and limitations of GDP
• Broader measures of well-being
• Measuring subjective well-being
Aggregate output a concept
Aggregate income another way of looking at it
Y an algebraic symbol for it
GDP the statistician’s measure
GDP
GROSS DOMESTIC PRODUCT

The value of final goods and services produced

in a country in a year
GROSS DOMESTIC PRODUCT
The value of final goods and services produced
in a country in a year
ITEM QUANTITY WEIGHT TOTAL
Shirts 50 10 500
Haircuts 30 2 60
Tanks 5 1 5
GRAND TOTAL 565
Economists assume that in unregulated competitive
markets, the relative prices of goods reflect the
relative marginal valuations that society puts on
those goods.

A good’s relative price at the same time reflects its

opportunity cost.

Therefore, market prices (where they exist) are

used as weights.
ITEM QUANTITY PRICE TOTAL
Shirts 50 1 50
Haircuts 30 2 60
Tanks 5 100 500
GRAND TOTAL 610
GROSS DOMESTIC PRODUCT (GDP) IS…..

The value of final goods and services produced

in a country in a year
WHEAT

Sold to miller
for $10
Total value of
production is
FLOUR
Sold to baker
for $25
10 + 25 + 50 = 85

Sold to
BREAD consumer for Is this correct?
$50
WHEAT
Value added = 10
Sold to miller for
$10 Total value of
production is
FLOUR
Value added = 15
Sold to baker for 10 + 15 + 25 = 50
$25

BREAD
Value added = 25
Sold to consumer
for $50
GROSS DOMESTIC PRODUCT (GDP) IS…..

The value of final goods and services produced

in a country in a year

Macro policy is usually a national responsibility.

GROSS DOMESTIC PRODUCT (GDP) IS…..

The value of final goods and services

produced in a country in a year

No second hand goods.

GROSS DOMESTIC PRODUCT (GDP) IS…..

The value of final goods and services

produced in a country in a year
Goods consumed but not produced in the
country are not included
Goods produced but not consumed are
included
GROSS DOMESTIC PRODUCT (GDP) IS…..

The value of final goods and services

produced in a country in a year

GDP is a flow, not a stock.

 PLAN
• Economics and well-being
• GDP per capita comparisons
• Defining GDP
• GDP is both product and income
• Uses and limitations of GDP
• Broader measures of well-being
• Measuring subjective well-being
Consumption goods

Capital goods
 Factors of Production
Labour Capital

Farmer’s value added 6 4

Miller’s value added 9 6

Baker’s value added 17 8

GDP
(factor
income)

Total Income 32 18 50
GDP = C + I + G + X - M GDP = factor income
+ net product taxes
 GDP in Australia

2008–09 1,263,934
2009–10 1,293,380
2010–11 1,317,914
Consumption 712,181
Government Expenditure 233,697
Private 276,406
Public corporations 25,484
General government 54,143
Gross Fixed Capital Expenditure 356,033
Change in inventories -3,913
Exports of goods and services 253,762
Imports of goods and services -258,383
GDP 1,293,380

Compensation of employees (Wages) 618,137

Private non–financial corporations 248,846
Public non–financial corporations 16,229
General government 26,924
Financial corporations 59,433
Gross Operating Surplus (Profits) 351,432
Mixed Income (non-incorporated business) 195,946
GDP at Factor Cost (Total Factor Income) 1,165,515
Taxes less subsidies on prod. and imports 127,865
GDP 1,293,380
 PLAN
• Economics and well-being
• GDP per capita comparisons
• Defining GDP
• GDP is both product and income
• Uses and limitations of GDP
• Broader measures of well-being
• Measuring subjective well-being
Some uses of GDP:

•Comparing the ‘size’ of different economies

•Comparing the welfare levels of different

countries (GDP per capita)

•Track output of one country over a long time

(growth perfermance)

•Measuring the cyclical (year-to-year)

behaviour of the economy
PROBLEMS WITH GDP
1. Insufficient or misleading information
(i) Changes in product quality
(ii) Non-market production
(iii)The black market, cash economy
2. Measuring the wrong things
(i) Production is not quality of life
(ii) Environment damage and resource
depletion not accounted for
 PLAN
• Economics and well-being
• GDP per capita comparisons
• Defining GDP
• GDP is both product and income
• Uses and limitations of GDP
• Broader measures of well-being
• Measuring subjective well-being
If GDP is not in itself a good measure of wellbeing, it might
be a good proxy for other measures, if they are correlated.

How does GDP per capita correlate with:

• Health measures?

• Life expectancy

• infant mortality

• Education Measures?

• Literacy

• Average years at school

If it isn’t a good proxy, then a composite statistic
gives a broader picture.

United Nations Human Development Index (HDI)

 PLAN
• Economics and well-being
• GDP per capita comparisons
• Defining GDP
• GDP is both product and income
• Uses and limitations of GDP
• Broader measures of well-being
• Measuring subjective well-being
National Accounts for Well-being

Source: National Accounts for Wellbeing

Do countries with higher social well-being also
have higher personal well-being?
Does money buy happiness?